REFORM OF THE CENTRAL BANK’S
OPEN MARKET OPERATIONS
The recent two moves of the People's Bank of China (PBC) in the open market have attracted extensive attention. Firstly, the PBC made 12 bond repo operations successively on the open market since June 2002. Secondly, on September 24, 2002, the PBC decided to convert immature repos done through open market operations from June 25 to September 24 into central bank bills with the same maturities, meaning that the central bank issued short-term bonds.
In money markets abroad, diversified money market instruments not only indicate sophistication, but also lay a foundation for the central bank's monetary policy operational framework. The recent act of the PBC enriched the instrument of open market operations and increased the amount of securities for the open market operation.
Practices abroad
In order to promote the development of domestic money markets, countries all over the world encourage innovations in money market instruments. In Germany and Indonesia, as an important money market participant, the central bank can create some money market credit instruments in order to meet the requirement of monetary policies. This not only increases the type and amount of money market credit instruments, but also guarantees the effective implementation and transmission of monetary policies.
In Germany, the 42nd provision of The Bundesbank Act stipulates that, with the approval of the federal government, the federal bank can convert eight billion Deutsche Mark of government equalization claims obtained in the 1948 monetary reform into treasury bills and fiscal discount securities (encashment securities for short). The federal bank acted as the issuer and assumed the liabilities derived from securities encashment. Subsequent decrees stipulate that when the encashment of securities issued reaches the amount of equalization claims, the federal government must provide the federal bank with treasury bills and fiscal discount securities of not more than eight billion Deutsche Mark upon the bank's demand. The federal bank's statutory power to issue liquidity securities strongly supports the central bank in adjusting the financial system liquidity.
Historical review
The PBC began to issue financing bills as early as 1993. However, the purpose of the PBC during this time was to adjust unbalanced funds among regions and financial institutions, rather than to regulate the liquidity of commercial banks. So issuance was random and lacked an effective and permanent system.
Enlightenment and references
The limited securities held by the central bank seriously restrict China's open market operations. The central bank's decision to convert repos into central bank bills and take the pledged bond out of pledge provides more room and flexibility for open market operations. In order to effectively increase the central bank's securities balance, the author puts forward the following suggestions: First, based on the consummation of the central bank’S financing bill issuance, as well as repositioning its aim of liquidity adjustment, the central bank should be endowed with the power to issue securities. Secondly, fiscal overdraft and borrowings incurred before the 1994 financial system reform should be converted into treasury bonds so as to increase the amount of securities held by the central bank.
（by Fan Lifu & Lan Yun）